United they save

Competitors put aside their differences in favor of alliance programs, streamlining commodity operations and bringing new services to tenants.

Remember the purchasing scandal that gripped the Pentagon a few years back? The General Services Administration discovered that the Defense Department was paying outrageous prices for commodity goods. In one famous example, a hammer cost several hundred dollars.

Truth to tell, the hammer didn't cost all that much. But buying the hammer did. The Pentagon purchasing system required people to fill out forms and send them on their way to the next department in line.

Finally, a complete purchase order reached the vendor, and a hammer wended its way back to the person who ordered it. The labor and paper chewed up in the process raised the price to unjustifiable levels.

The B2B solution Most large organizations suffer from the same kinds of high purchasing expenses. But today, business-to-business (B2B) technology has emerged as a tool that may significantly reduce the high cost of buying inexpensive supplies. Traditional competitors are joining forces to build infrastructures that will rationalize purchasing and other business system formulas, thereby reducing prices paid and sometimes prices charged.

General Motors, Ford, and Chrysler, for example, recently created a consortium designed to buy and then resell commodity materials for each company using Internet technology. Construction companies and sporting goods manufacturers, among others, have announced similar ventures.

Now, nearly a dozen new real estate consortia have sprung up in the past year, offering services designed to streamline purchasing systems and assist customers and tenants. At least five of these groups focus on commercial real estate, with several consortia members playing leading roles in the shopping center industry.

Project Octane, for example, combines the efforts of CB Richard Ellis, Insignia ESG, Jones Lang LaSalle, and Trammell Crow Co. in pursuing three initiatives. First, this consortium aims to streamline more than $5.3 billion in annual material and service purchases for properties under management. Second, Project Octane is developing an Enterprise Resource Planning (ERP) system designed to streamline back office accounting operations and plug into the purchasing system. Finally, the alliance hopes to establish a system capable of handling sales and leasing transactions online.

Project Octane clicked into action in July of this year as three of the alliance's now four members jointly invested $30 million in an electronic procurement company called SiteStuff.com, which will build the technology platform for the group's ongoing purchasing efforts.

In another undertaking called MerchantWired, Simon Property Group has brought together seven shopping center owners in an effort to bring high-speed cable Internet access to 400 properties. The program will enable retailers to tailor e-tail, procurement, and other Internet-based business efforts to individual stores. Members of MerchantWired include Simon, The Macerich Co., The Rouse Co., Taubman Centers, Urban Shopping Centers, Westcor Partners, and Westfield America. The new alliance committed to spending $140 million on the project in 2000.

While Project Octane and MerchantWired pursue specific goals important to alliance members, other consortia have emerged with more general interests. Project Constellation, for instance, combines a variety of investment and real estate interests into a group seeking to invest in and incubate real estate-focused technology initiatives. Members of the Constellation alliance include AMB Properties, CB Richard Ellis, Chase H&Q, Equity Office, Equity Residential, Jones Lang LaSalle, Kaufman & Broad, Morgan Stanley Dean Witter, Simon, and Trammell Crow.

Competitors cooperate Such alliances, many of which were formed by companies more accustomed to competing with each other than cooperating, arise from the common need to find systems that will tackle everyday business tasks faster, cheaper, and better.

That's the focus of Project Octane. "Empirical evidence suggests that re-engineering procurement processes can reduce the cost of operations significantly," says Sven Pole, a principal in the San Francisco based e-commerce group of Trammell Crow. "There are two primary benefits to using a procurement portal. First, you can aggregate purchases with others and gain economies of scale. Second, if you have accounting systems ties with that system, you can capture process economies. In other words, you can buy stuff cheaper and spend less time buying it."

Faster, cheaper, better for tenants is the goal of the shopping center members of the MerchantWired alliance. "For us to build separate networks to provide the same tenants with similar online services makes no sense," says Cordell A. Lietz, senior vice president of technology and strategic investments with Taubman. "Tenants want one network to serve all of their properties. So when we talk to a tenant like American Eagle, who just signed up 500 stores with MerchantWired, we have the ability to get them online faster and more efficiently than any other provider."

Project Constellation members hope their investments will help create new companies that will in turn build electronic infrastructures capable of enabling real estate firms across the spectrum to operate more efficiently.

But alliances must also take care not to run afoul of antitrust legal concerns related to collaboration between competitors. "People in our industry are sensitive to these issues," says Robert Minutoli, senior vice president for new business with The Rouse Co. "Rouse is very conservative in interpreting the rules strictly."

Toeing the line The Federal Trade Commission (FTC) monitors what it calls "competitor collaboration" and has laid out antitrust safety zones that govern what allied competitors can do.

According to Antitrust Guidelines for Collaborations Among Competitors (www.ftc.gov), issued jointly by the FTC and the U.S. Department of Justice, one safety zone covers collaborations which involve participants who "collectively account for no more than 20% of each relevant market in which competition may be affected."

According to Pole of Trammell Crow, MerchantWired easily meets that requirement. "Last year, the four companies represented in Project Octane did roughly 12% of the transactions in their market overall," he says. "That falls clearly within the FTC boundaries."

Pole also notes that while a handful of companies have created Project Octane, the online resources it will offer are open to everyone in the commercial real estate industry. "These exchanges to be successful must be open," Pole explains. "By definition, an open exchange can't be monopolistic."

While taking care to remain well within legal competitive boundaries, the shopping center industry is uniting with a common purpose: to use technology to serve its customers faster, cheaper, and better.